Earnings Aren't Really Earnings Anymore
08/01/2012 10:30 am EST
Too many games are being played—and succeeding—for earnings estimates to be a real predictor of long-term strength, writes Jack Adamo of Insiders Plus.
The Dow has moved more than 100 points either up or down for the last six days, with five of them closing with more than a 100 point gain or loss, and yet the VIX “fear gauge” has fallen back to 16.
Fear has disappeared. All the market needs to hear is some central banker, either here or in Europe, say they’re gonna take care of it, and the market turns around and heads for the sky.
This is great for our stocks, but the outlook is bleak for our hedges. If economic statistics come up weak, the talk is that the Fed will trot out QE3. If they come up strong, everything is going to be fine.
There is still some hope for a last-minute reprieve, but we only have seven weeks until our put options expire and three weeks from now is the annual economic summit at Jackson Hole at which the Fed can be expected to pull a rabbit out of his hat if needed. So, frankly, odds are we are looking at dead money.
Despite the market’s recent strong performance, I’m still cautious. I spent a lot of time this week reviewing GDP data, the ECRI’s recession calls (I recorded them all), money flows, etc, and while I don’t think the Apocalypse is at hand, I still can’t believe the economy is not headed for more trouble. That has to be reflected in the market, albeit later than I expect, as usual.
Here’s just one piece of anecdotal data that causes me concern. About 70% of companies reporting earnings have beaten estimates. Normal for this statistic is 60% to 70%, but more companies are getting wise to the game, so it’s trending higher.
Meanwhile, about 70% missed on straightrevenue estimates. That’s way higher than normal. Earnings growth is slowing, and it’s being covered up by reducing expectations, making adjustments to reserves, and then beating the revised expectations.
A statistical study discussed in Barron’s this week said these last-minute revisions can come as close as three days before the earnings report, and the market will still take the subsequent “beat” as a positive surprise. It’s simply astonishing.
The market doesn’t want to see the sliding revenues, but at some point it will have to. Maybe it won’t be until next quarter, or maybe after the elections and the normal first quarter run-up in the spring, but I think we’ll see negative earnings comparisons and shrinking P/Es that will lead to a significant correction.
The market is still treating the current malaise as a normal inventory-rebalancing recession. It is not. It is a deleveraging recession that will take at least a decade, although it will have bull rallies and bear pullbacks within that process.
Right now, we are almost certainly near a rally top. I’m willing to wait a few quarters to get better prices, rather than jump on the bandwagon at this point.